The "Essence" Test and Substantial Transformation
Nov. 22, 2020
By: Lois E. Wetzel
In HQ H304238 (Nov. 19, 2020), Customs was asked to determine whether the fiber optic connector cleaning products were products of Japan or China for purposes of Section 301 duties on products of China. In the process of analyzing the origin question, Customs indicated it was applying the substantial transformation test. We recently reported that the substantial transformation tested has become ambiguous and unpredictable. HQ H304238 is an example of ambiguity and unpredictability.
As we discussed previously, the ambiguity stems from the fact that there seem to have developed several sub-tests under the rubric of the “substantial transformation” analysis.. There appears to be one test that focuses on whether a “new article of commerce” has emerged, there is another that asks whether the imported material has a predetermined end use, there is also the “value added” test, and apparently the “essence” test, possibly among others.
The essence test was applied in HQ H304238 and is primarily an off-shoot of the “change in character” criterion of the substantial transformation analysis. The essence test, as set forth by Customs, first considers whether the components imported into the country of additional manufacturing form the “very essence” of the finished product or impart the “essential character” of the final good. If the imported components impart the essential character of the finished product, then they do not undergo a substantial transformation in the country to which they were imported for manufacturing and the origin of those components is the origin of the finished product.
In HQ H304238, the cleaning product for fiber optic connectors was comprised mainly of a Japanese-manufactured cleaning thread, chip, and springs, which were exported to China from Japan for assembly with several other small parts from China including caps, reels, caulking rings and a conversion cap. Under the “essence test,” Customs first considered whether the cleaning thread, chip, and springs imparted the essence or essential character to the cleaning product. Customs found that the three Japanese components did impart the essential character to the cleaning products and were, in fact, “key to the products’ design.” Customs then explained that the identity of the Japanese products did not change as a result of the assembly process that occurred in China, which entailed screwing, gluing, and press fitting. Because the identity of the essential products was not transformed in China, Customs held the country of origin for the cleaning products to be Japan.
Generally, in the customs law “essential character” is used to determine when an incomplete or unfinished good may be treated as the complete or finished good, or to determine which article in a mixture or composite article will provide the classification. In other words, essential character is usually a classification concept. Only in the NAFTA regulations is “essential character” used to determine origin. However, to the extent the “essence” test really is searching for the “essential character” it appears that the NAFTA regulations are bleeding into the non-NAFTA (or USMCA) origin analysis.
Should you have questions about substantial transformation in any context, do not hesitate to contact an attorney at Barnes, Richardson & Colburn, LLP.